TSX, Dow head lower after Shanghai stock exchange dives 8%

North American stock markets were knocked back on Monday, with the TSX dipping below 14,000 for the first time since December, after China's main stock index lost eight per cent in its worst one-day performance since 2007.

The Shanghai share index suffered a renewed sell-off despite government efforts to calm the market, ending down 8.5 per cent at 3,725.56 with most of the plunge occurring in the last hour of trading. Other stock benchmarks around the world were also lower.

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The New York Stock Exchange performed similarly, with the Dow Jones Industrial Average down 127 points or 0.7 per cent to 17,440. The Nasdaq Composite Index fell 47 points to 5,040.

Monday's fall on the Shanghai market was the biggest one-day decline in Chinese stocks since an 8.8 per cent plunge on Feb. 27, 2007, according to financial data provider FactSet.

About 1,700 stocks fell the maximum 10 per cent allowable in any single day, including China Life Insurance, Shenhua Energy and Bank of Communications.

Chinese stock prices are still 75 per cent higher than they were last year and up 15 per cent since January. Today's plunge follows a steep runup in stock prices encouraged by China's leadership, which was predicting new heights for shares despite signs of a slowing economy.

30% fall in June

In June, the Shanghai market fell by 30 per cent as investors began to see lower corporate profits. Many small retail investors were hurt by the rout.

But Beijing stepped in to try to bolster the market, relaxing rules on insider trading, banning short selling and encouraging state-owned firms to invest heavily. Shanghai's stock index bounced upward again.

There were reports Monday that brokerages, who have been extended credit during the crisis, have begun restricting margin trading. Analysts are saying Beijing's efforts cannot continue to boost share prices.

That sparked panic selling, especially among China's neophyte retail investors.

"The continuous check on margin trading by security companies has triggered today's sell-off," said Xu Xiaoyu, a market strategist at China Investment Securities. "In addition, the recent economic data shows it still takes time for the economy to recover from its sluggishness."

Warning from IMF

In private talks, the IMF has told China's leadership it should not be intervening in the stock market and should let market forces dictate the direction of the market. However today's drop will lead to renewed pressure on Beijing to intervene.

The Chinese sell-off rattled other markets in Asia. Hong Kong's Hang Seng shed 3.1 per cent at 24,288.54 and Japan's Nikkei 225 dropped 1 per cent to 20,350.10. South Korea's Kospi fell 0.4 per cent to close at 2,038.81. Stocks in Southeast Asia were lower. But Australia's S&P/ASX 200 gained 0.4 per cent to 5,589.90.

Asian stocks had already started the week on a dour note, rattled by a last week's report on Chinese manufacturing that showed a contraction in output. That sparked a sell-off in gold as well as copper and other commodities, a trend that will weigh on Canada's resource-heavy stocks.

Oil is also in retreat, with West Texas Intermediate down two per cent to $47.07 US on evidence the oil glut is growing. U.S. drilling has picked up and there is more oil coming out of Iran after the easing of sanctions. 

The National Bureau of Statistics reported this week that China's industrial profits contracted 0.3 per cent in June over a year earlier, marking a second straight month of decline. That could indicate that the economy has slowed more than China's leadership have anticipated. GDP growth for 2015 was expected to be seven per cent.

The Shanghai exchange is closed to direct investment by foreign individuals, however international investors may be exposed to the market through institutional funds or through Chinese companies listed elsewhere.

But the main impact on North American markets is that a waning Chinese economy means lower demand for many of the things Canada produces, from lumber to minerals to copper.